Executive Employment Contracts: Definition & Negotiating

What is an executive employment contract?

An executive employment contract is a formal agreement between a company and its executive that outlines job duties, salary, benefits, and other perks like bonuses or stock options. It also includes important terms for termination, confidentiality, and non-compete clauses. This contract helps set clear expectations and legal safeguards for both the executive and the company.

Navigating through executive employment contracts can often feel like treading uncharted waters, given their complexity and the high stakes involved. However, with a deeper understanding of the key components and industry standards, you can negotiate terms that not only reflect your worth but also secure your professional and financial future.

This guide sheds light on the six crucial areas of executive employment contracts and offers insight into maximizing your compensation and benefits.

1. Base Salary

The base salary forms the cornerstone of your compensation package. An executive or c-suite employee’s annual salary is shaped by industry benchmarks and the cost of living in your company’s geographic area.

In recent times, organizations are leaning towards incentive-driven remuneration to align executive performance with company goals. However, ensuring a competitive base salary remains pivotal.

2. Short-Term Incentives

Many companies include annual incentives and bonuses in executive compensation plans. These short-term bonuses, usually given at the end of the year, reflect an executive’s performance in their role. The amount can vary widely across different industries and markets.

Bonuses might be a fixed amount, or based on a set percentage of the executive’s base salary or the company’s profits. Some companies use a tiered system, offering a “target” bonus for good performance and a “stretch” bonus for outstanding achievement.

3. Long-Term Incentives

Like short-term bonuses, long-term incentives are a common part of executive compensation plans, helping ensure executives are effective and committed in their roles. These incentives are usually aimed at high-ranking executives whose work significantly influences the company’s success.

Unlike short-term bonuses, long-term incentives encourage both strong performance and loyalty to the company, enhancing its value through accumulated expertise and experience over time.

As companies shift focus from immediate profits to long-term success, these incentives are becoming more popular and sophisticated. They often include equity-based rewards, aligning the executive’s gains with the company’s growth.

Here are some common long-term incentives:

• Non-Qualified Stock Options (NQSOs): NQSOs empower executives with the opportunity to purchase company stock at a predetermined price, offering a lucrative avenue for financial growth as the company thrives. However, it’s pivotal to note that the financial windfall from NQSOs could diminish if the company’s stock performs poorly in the market. Understanding the market trends and the company’s growth trajectory can help in evaluating the potential benefits of NQSOs in your compensation package.
• Stock Option Plans: A Stock Option Plan is a flexible incentive allowing executives to obtain company securities under certain conditions. To reap these benefits, executives need to hit specific milestones, whether they’re based on tenure or performance. Once these conditions are met, the stock “vests,” enabling executives to exercise their options. Being mindful of the vesting schedule and any expiry dates is crucial to make the most out of Stock Option Plans.
• Golden Handcuffs: The phrase “Golden Handcuffs” refers to a retention tactic where executives are offered a sizable payout, provided they stay with the company for a specified period. This incentive aims to deter brief tenures and encourage a long-term alliance between executives and the company. By grasping the terms of Golden Handcuffs, executives can more effectively map out their career paths while reaping notable financial benefits.

4. Benefits

Similar to salaried employees, executives are also entitled to benefits. These may encompass enhanced health and dental coverage, long-term disability insurance, life insurance, additional sick days, extended vacation days, and more holiday time.

5. Perquisites

Perquisites, widely known as “perks,” are non-cash privileges often provided alongside financial compensation. They are usually customized to meet the specific needs or preferences of individual executives, given their work conditions.

Some examples include:

• Gym memberships
• Provision of cell phones and other tech gadgets
• Allowing spouses to accompany on international business trips
• Educational reimbursement plans
• Vacations
• Golf or country club memberships
• Home security systems
• Access to company or private vehicles and airplanes for travel

6. Severance and Change-In-Control Agreements

Executive compensation plans may also outline what executives will receive if their employment ends or if the company changes ownership or control.

• Severance Agreements: are fundamental in providing financial cushioning to executives in the event of termination without cause. Executive contracts often stipulate enhanced severance packages, which can be as much as 24 months’ pay. Some agreements also go the extra mile, accounting for an executive’s years of service with a previous employer when calculating severance. Well-negotiated severance agreements can act as a significant incentive for executives transitioning to a new company, alleviating concerns over financial stability should the new role end prematurely.
• Golden Parachutes: are clauses stating that if the company changes ownership or control, the executive will receive a set amount of money, property, stock options, pension, or insurance benefits. These clauses can serve less as compensation for executives and more as a way to deter hostile takeovers by raising the costs of acquisition.

Employment lawyers for executive employment contracts

Delving into and negotiating your executive employment contract transcends mere formality; it’s a pivotal stride towards forging a tenure that’s reciprocally beneficial and resonates with your long-term career ambitions.

At Samfiru Tumarkin LLP, our seasoned and esteemed employment lawyers have dedicated decades to meticulously reviewing and enhancing employment agreements for executives. Our proven track record extends to securing substantial severance packages for a number of clients across Ontario, Alberta and B.C., specifically c-suite personnel and executives.

We stand ready to review your unique situation, enforce your rights, and ensure that you receive the compensation you are legally entitled to.